An Upside Surprise for July Durables?
By Michael Englund
The U.S. durable goods report for July that will be released on Aug. 25 could be stronger than most economists expect because of recent gyrations in the U.S. trade data. The rebound may be even bigger for the equipment statistics within the durables report for either July or August than is reflected in the Institute for Supply Management and industrial production data.
June data indicate that U.S. production at the end of the second quarter was depressed by a surge in the trade deficit (see BW Online, 8/16/04, "The Trade Deficit's June Swoon"). Similarly, a likely drop in the deficit in July presumably explains that month's production rebound. But the swing in the trade figures for the capital-goods sector was particularly severe in June and probably July, which suggests that the production swing for this sector might be extreme as well (see BW Online, 8/17/04, "Straightening Out the Summer 'Zig-Zag'").
The trade deficit in June was disproportionately large for the equipment sector, with a 5.3% surge in imports and an 8.9% freefall in exports that sharply exceeded the broader trade swings. The huge associated widening in the June deficit for trade in capital goods to $9.2 billion, from $5.4 billion in May, marks a $3.8 billion deterioration for this one sector that constitutes only 8% of the U.S. economy but nearly half of the month's higher trade deficit.
POWERFUL GROWTH TREND?
The last set of durable-goods and factory reports revealed that domestic production of nondefense capital equipment actually rose 1.4% in June despite the sharp drop in exports and surge in imports, which one might have expected to depress the production figure. If you calculate U.S. purchases of nondefense capital equipment in June vs. production, by adding back imports and subtracting exports, you'll see a huge 7.1% June surge.
This is an impressive statistic, as it suggests a powerful growth trend for U.S. demand for equipment and software that wasn't captured by the production-based factory statistics in June.
If a trade-deficit swing between June and July is met by a "counterswing" in the U.S. production statistics that allow the "demand" and "supply" indicators to meet in the middle, shouldn't the same pattern be even more evident in the equipment data? If so, then the second-quarter equipment-production figures, which were solid despite being depressed by trade, should be followed by even stronger figures in the third quarter, with strength in either July or August.
A BOOM AT BOEING.
Therefore, it's quite possible the numbers will show an upside surprise in this next durable-goods report, which may display outsize gains for shipments and, possibly, orders. The median forecast for July durable-goods orders is for 1% growth, and this is probably also the consensus for shipments. At Action Economics, we're projecting a 2% increase in orders and a 1.5% rise in shipments in July, with the trade swing accounting for much of the upside to shipments and for some of the orders increase.
Orders could also pop because of a surge in non-U.S. bookings at Boeing (BA ) to 75 planes in July, which is a hefty 27% of all the 280 aircraft orders we expect to see at the U.S. giant for 2004 as a whole. Reported Boeing orders don't always coincide with orders gains as measured by the Commerce Dept., but the timing implies substantial upside possibility for the July orders data.
The ramifications of the trade data are more significant for the shipments statistics than the orders data. But the shipments data for equipment directly determine the figures reported for the equipment and software component for gross domestic product (GDP), and hence have a more immediate implication than the more glamorous orders data.
The swing in the capital-goods data within the trade report provides one reason why we at Action Economics "hedged" our assessment of the downside risk to second-quarter GDP, which we expect to be revised lower to 2.7% from 3%. The revision could be smaller than expected, if the domestic equipment-purchase numbers are revised upward in response to the equipment trade data, which revealed strong equipment imports and hence strong domestic second-quarter equipment purchases.
However, regardless of whether the second-quarter revisions capture the trade gyration, we expect a big impact in the third quarter. Real equipment purchases are poised for a solid 12% growth pace in that period, following a 10% growth rate in the second quarter and 8.1% in the first. Such gains will be implied if the nondefense capital-goods shipments figures for July reveal the gains we expect of 2% to 2.5% for shipments and 1.5% for orders.
Englund is chief economist for Action Economics